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Operator
Good day, ladies and gentlemen.
Thank you for standing by.
Welcome to the Pan American Silver second-quarter 2009 earnings conference call.
During today's presentation, all parties will be in a listen-only mode.
Following the conference, we will be open for questions.
(Operator Instructions).
This conference is being recorded today, Wednesday, the 12th of August, 2009.
I would now like to turn the conference over to our host, Mr.
Geoff Burns, President and CEO.
Please go ahead.
Geoff Burns - President, CEO
Thank you, Operator.
Good morning, ladies and gentlemen, and welcome to Pan American Silver's second-quarter earnings release conference call.
Joining me today here in Vancouver are Steve Busby, our Chief Operating Officer; Michael Steinmann, our Executive Vice President of Exploration and Mine Geology; Rob Doyle, our Chief Financial Officer; and Kettina Cordero, our Coordinator of Investor Relations.
During our last conference call in mid May I described the first quarter of 2009 as being a turnaround quarter for Pan American Silver as we successfully reduced or consolidated costs by 28% and moved back into the black on all financial metrics.
On that call I also openly expressed my optimism that our results would only get better over the balance of 2009 as our two newest mines, Manantial Espejo in Argentina and San Vicente in Bolivia, ramped up to full production capacities.
It is indeed rewarding to have delivered on that optimism during the second quarter.
Here are our headlines -- in the second quarter we produced a new quarterly company record, 5.8 million ounces of silver, up 28% from the same period a year ago and up 19% as compared to our first quarter of this year.
Our quarterly gold production also climbed by 20% from the first quarter to a quarterly company record of 25,000 ounces.
Gold is now clearly our most significant byproduct, accounting for 18% of our total revenues.
Our consolidated cash costs remain stable at $5.99 per ounce, just slightly below our full-year forecast of $6.00 per ounce.
This is extremely gratifying as we have been able to hang onto the massive cost decline we reported during the previous quarter.
We generated mine operating income of $23.5 million, more than double what we generated in Q1; cash flow from operating activities was a very healthy $32 million or $0.37 per share, also significantly improved from Q1; and our bottom line was solid with quarterly adjusted net income of $13.5 million or $0.16 per share, again almost double the income we reported in the first quarter of this year.
It wasn't all smooth sailing in the second quarter, but then it rarely is.
After 25 plus years in this business I've come to learn that this is mining and there is always something.
As Steve will talk about in a moment, we had to deal with the Swine Flu outbreak in Mexico and the government's response thereto.
We had a short-lived labor disruption at our Morococha mine in Peru followed by a mechanical issue with our primary ball mill at the same operation.
And as Rob will discuss, we had to deal with, hopefully, the temporary closure of the Doe Run smelter in Peru, the primary purchaser of our high-value silver copper concentrates.
But I've also learned that when you have a diversified asset base and a top-notch operating development team there's usually some good news that helps keep things on track, and we add more than our share of that this past quarter.
Manantial Espejo is solidly outperforming our projections thanks in large part to the fact that we're churning out more gold than we expected.
San Vicente's ramp up rivals Manantial's in terms of timelines and performance, allowing us to declare commercial production in the first quarter of operation, some three months ahead of schedule.
Our Mexican operations have been spot on, with Alamo Dorado continuing to outperform our estimates and La Colorada meeting every challenge that you can imagine in an underground mine and still hitting right on forecast.
When we totaled up all the pieces we delivered some pretty happy second-quarter results.
With that I'd like to turn the call over to Steve, Rob and Michael who I know will provide you with some additional color and commentary on our operations, development projects, financial condition and exploration programs.
Steve?
Steve Busby - COO
Thank you, Geoff.
After the last five years of intensive project development and mine construction work it is a pleasure to report our record breaking second-quarter results to you today which highlight our Company's now proven talents in bringing dreams into reliable producing mines that generate a solid economic base locally while providing returns to our trusting shareholders.
Let me start by jumping right into great news with our outstanding performance at Manantial Espejo in Argentina where we produced just over 1 million ounces of silver at a cash cost of negative $0.93 per ounce net of an excellent byproduct credit from nearly 18,500 ounces of gold production which more than covered all of our operating cost just by itself.
Our startup hasn't been without its own challenges as we had lost one of our critical grinding mill motors during the quarter which fortunately was replaced in early July without incurring a material impact to our 2009 forecast production or cost.
Despite this disruption I believe the production and cost results speak for themselves.
In particular the plant processed over 144,000 tons of ore in the second quarter which is almost 80% of the plant design capacity in spite of the failed mill motor issue.
The silver feed grade for the quarter was 232 g per ton with 88.5% recovery, just shy of our expectations, whereas the gold mill feed grade was 3.8 g per ton and 94.4% recovery which is ahead of our expectations.
We feel confident we'll be able to achieve our targets for both production and certainly for cost for 2009 at Manantial Espejo given we have completed the necessary plant winterization projects in time to prevent any weather-related disruptions.
I'd like to give a special recognition to our Argentine workforce who has recently been named the Argentine 2009 Mining Company of the year by the primary Argentina mining press in Argentina's association for the development of the mining industry.
This is an award well received by the staff who has put in long hard hours getting the job done right and bringing this mine into production safely and efficiently.
Our Peruvian operation produced just over 1.9 million ounces of silver in the quarter which was slightly ahead of our projections given continued profitable production at the Quiruvilca mine at the current improved metal prices offset by setbacks from the labor strike and grinding mill breakdown at Morococha, as well as a breakdown of the growing mill at Huaron which caused a four-day disruption there.
Cash costs at our Peruvian operations were much higher than expected at $10 an ounce in the second quarter compared to our target of $8.00 per ounce.
The high costs were largely due to higher smelting costs caused by the Doe Run smelter shut down that Rob Doyle will discuss in more detail later.
Along with the impacts of the mill breakdowns at Morococha and Huaron, and the fact that at Quiruvilca all costs, including expenditures that in the past would have been capitalized, are being expensed as we prepare that mine for care and maintenance.
As reported last quarter, we expect to be able to continue reduced operations at Quiruvilca for the next several months and into early 2010 provided metal prices stay at their current levels while we simultaneously prepare that operation for care and maintenance.
Overall we anticipate producing slightly above 2 million ounces per quarter at our Peruvian operations for the second half of 2009 at approximately $9.50 per ounce.
This assumes that the Doe Run smelter remains closed and we are subject to higher offshore concentrate treatment terms.
If Doe Run reopens sooner our costs could decline as much as $1.50 per ounce.
Our multi-year mine deepening project at Huaron is nearing completion and has successfully de-watered the mine, the entire mine, 70 m below the main drainage tunnel which had originally been driven in the late 1940s and early 1950s.
This mine deepening allows us access to all the historic high-grade vein structures that had been mined out above the drainage tunnel during the long successful industry at the Huaron mine and we expect to start reaping benefits from this important investment gradually beginning in the next few months and lasting for many more years to come.
We are also advancing a significant number of mine developments at Morococha which are intended to access some of our newly discovered reserves at the Morro Solar area as well as reserves which will be mined for the next several years.
I'd also like to make a special recognition to our Peruvian workforce who has recently been awarded the prestigious 2008 Peruvian Company of the Year from the Peruvian Association of Civil Companies.
We operate challenging underground narrow vein mines in Peru and it is particularly gratifying to see our group recognized for all their outstanding efforts in safety, environmental cleanliness, proactive community interactions and productivity.
Once again our Alamo Dorado mine in Mexico led the Company producing more than 1.4 million ounces of silver at a cash cost of $4.23 per ounce helped by over 4,000 ounces of gold production versus our forecast of only 3,300 ounces, in addition to milling an average of over 4,600 tons per day or 10% ahead of our target.
Even sooner than we had expected, Alamo Dorado has already successfully made up for the entire five-day suspension of operation in May that was designed to combat the influenza outbreak.
We expect Alamo Dorado's silver production performance will continue with a slight increase in cash cost as gold production levels will reduce somewhat as the Phase II open pit lay back advances.
Alamo Dorado has lived up to all of our promises of becoming a solid, reliable, low cost silver producer for the Company with the extremely competent mining team we have developed there.
The La Colorada mine in Mexico produced 835,000 ounces of silver in the quarter, surprisingly ahead of our expectations despite incurring the five-day influenza suspension in May.
La Colorada produced at a cash cost of $7.23 per ounce, 12% below our expectations due to tight controls on spending that was instituted in late 2008.
We expect the production and cash cost performances we have had there for the first half of 2009 will be sustained through the second half.
We have a very strong operating team at La Colorada and we are all very excited about some of the future potential which I'm sure Michael Steinmann will discuss further in a moment.
I have saved some of our best news for last.
I'm very pleased to report outstanding success at the startup of our San Vicente project in Bolivia where we have produced over 616,000 ounces of silver to the Company's account at a cash cost of just over $9.00 per ounce -- declaring commercial production on April 1.
Ramp up of production is proceeding well ahead of projections and our cash costs are coming right in line with our projections of below $7.00 per ounce as the ramp-up continues during the start of the third quarter.
Our new plant processed over 50,500 tons in the first startup quarter, had mill feed grades of 445 g per ton silver, 2.1% zinc and 0.3% copper, which is nearly 75% of our design throughput capacity ahead of our silver grade expectations.
Our silver recovery for the quarter was 90% which is already well ahead of our life of mine average projection of 85%.
I look forward to reporting to you in our next quarterly update as it is looking like our production and costs are becoming a very nice story to tell at San Vicente.
We are advanced in some winterization projects and gaining confidence in the operation each day as the operators become familiar with the new plant and the expanded mine.
We are confident in our ability to meet our production and cost guidance for San Vicente given another smooth startup for the Company after constructing a quality plant and an expanded mine.
Overall Pan-American Silver had a solid quarter producing a record breaking 5.8 million ounces of silver at a cash cost in line with our projection of just under $6.00 per ounce.
And the beauty of all this is that we expect this level to continue or even expand slightly as our two new operations come into steady-state production in the second half of the year allowing us to achieve our production and cost guidances.
I'll now turn the call over to Rob Doyle for the financial update.
Rob Doyle - CFO
Good morning, ladies and gentlemen.
Our financial results in Q2 2009 [steadily] reflected much improved operating results -- mine operating earnings of $23.5 million for the quarter, an increase of 124% from the Q1 mine operating earnings.
Solid operating results were driven by record quarterly sales of $111.4 million as record production of silver and gold translated into significant increases in the quantities of precious metals sold.
These quantity increases resulted in a 7% higher sales than the comparable quarter of 2008 despite 40 plus percent declines in realized base metal prices and a 22% decline in realized silver prices from a year ago.
The addition of high-margin tonnage from Manantial Espejo and San Vicente combined with the continuation in the recovery of metal prices resulted in a further expansion of our margin per ton in Q2.
Our average margin per ton of ore milled has gone from about $10 in Q4 2008 to $28 in Q1 2009, and $[40] in Q2 2009.
Our consolidated total number of tons milled has increased by 27% over that same period.
Healthier margins and more tonnage, that is at the heart of our improving operating and financial results.
As Steve has discussed, our San Vicente mine in Bolivia enjoyed an exceptional startup, allowing us to declare commercial production as of April 1, 2009.
Just like Manantial Espejo the quarter before, commercial production at San Vicente was achieved in the first quarter after the completion of construction activities.
The mine produced over 600,000 ounces of silver and almost 700 tons of zinc for Pan-American, contributed $1.7 million of income to our bottom line and positive operating cash flow all in its first quarter of production.
San Vicente and Manantial Espejo are now in full production, we are seeing higher cost of sales and depreciation charges.
However, we continue to see good results from our cost-cutting efforts.
On a per ton basis our operating costs declined by 9% on average at our Mexican and Peruvian operations compared to Q2 2008, largely due to our cost initiatives and the benefits of weaker local currencies and softer markets for consumables and reagents.
These cost reductions were achieved despite the various short-term mechanical and labor-related shutdowns we endured both in Mexico and Peru during the quarter.
Our statement of operations in Q2 2009 did contain several charges that are worth further discussion.
The largest buyer of our copper concentrates and pyrite stockpile material in Peru, Doe Run Peru, which owns and operates the La Oroya smelter, began experiencing severe financial difficulty during the first quarter of 2009 and it was not able to draw on its credit facilities, looking at complete closure of the La Oroya smelter during 2009.
About 10 days ago Doe Run Peru was reported to have filed an application for bankruptcy protection under Peruvian laws.
At the end of Q2 2009 Doe Run Peru owed us $8.8 million.
In recognition of these circumstances the Company has established a doubtful debt provision in Q2 for $4.4 million or 50% of the amount receivable and, in addition, reclassified the remaining receivable balance of $4.4 million from current assets into long-term assets on our consolidated balance sheet.
This reclassification reflects our expectation that the remaining receivable balance will not be recovered within the next 12 months.
We recorded an additional charge of $0.6 million in Q2 related to the negative present value impact of the expected delay in the recovery of the Doe Run receivable.
Combined after-tax effect on earnings in Q2 of the charges related to our Doe Run Peru receivable was $3.3 million or $0.04 per share.
We have been able to sell our copper concentrates to other buyers since Doe Run Peru defaulted.
However, the current market terms are significantly inferior to the terms in our concentrate contracts with Doe Run Peru.
Sales of the Company's pyrite stockpile material have halted as Doe Run Peru was the only buyer of that material.
The lack of pyrite stockpile sales, increased treatment charges, freight costs, penalties and reduced payables related to our copper concentrate that were diverted from Doe Run in Q2 totaled approximately $2.1 million as before tax effects, and were significant factor behind the higher cash costs recorded by the Peruvian operations during the quarter.
Similar impacts are expected on our future results for at least the period that the La Oroya smelter remains closed or until market conditions for the sale of copper concentrates improves.
Also included in net income in Q2 was a non-cash foreign exchange loss of $1.2 million on the revaluation of the Company's cash and other working capital and future income tax balances that were denominated in local currencies.
Moving on to the balance sheet, our working capital increased by $16.8 million during the quarter, the combined result of increasing our cash and other current asset balances by $6.8 million and reducing current liabilities by $10 million.
Decreasing current liabilities was primarily a result of a decline in the unrealized cost on our FX contracts through financial settlements and the effect of a weakening US dollar.
Accounts receivable were study as a right down and reclassification of our Doe Run Peru receivable was offset by increases in other trade receivables as both Manantial Espejo and San Vicente ramped up operations.
We finished the quarter with a solid working capital position of $216.1 million at the current ratio of 4.4 to 1 and cash and short-term investments of $112.4 million and no debt.
That leaves us financially very well-positioned to respond to strategic growth opportunities.
From a cash flow perspective, cash flow from operations before working capital movements was $32.5 million in the quarter, a jump of $13.5 million from Q1.
We invested $19.7 million in property, plant and equipment during the quarter, $7.8 million of that amount was spent closing our construction payables and completing the expansion at San Vicente, while $7.2 million was spent at Manantial Espejo completing refinements to plant and machinery at the mine.
In addition, we invested $4.6 million on capital projects at our other operations.
With the construction of Manantial Espejo and San Vicente now complete we are at the end of a period of heavy capital expenditures which have seen Pan American investing approximately $580 million in its development projects and operations since the beginning of 2005.
As we saw in Q2 2009, I expect to see our cash balances continuing to build in the coming quarters as our mines provide returns on those investments by generating positive cash flow.
With those comments I'll hand it over to Michael for an update on our exploration activities.
Michael Steinmann - EVP, Geology & Exploration
Thank you, Rob, and good morning, everybody.
Q2 was a very active quarter for our exploration on both greenfield and brownfield projects.
We drilled over 26,000 m of diamond and [ancillary] drilling as part of our 53,000 m annual drill budget.
In addition, we executed over 4,200 m of diamond drilling at our La Preciosa JV with Orko Silver in Mexico.
The JV was announced on April 14 for the large 32,000 hectare land package including an indicated resource of 72 million ounces of silver on an inferred resource and an inferred resource of 97 million ounces.
Pan American will spend this year $5.7 million for exploration, metallurgical studies, site improvements and development.
This budget includes over 30,000 m drilling for diamond drilling for a cost of about $3 million.
But let's have first a more detailed look at the brownfield programs for each of our operations.
Although we encountered very good results from all of our brownfield programs, La Colorada returned by far the highest grade [interstocks].
Exploration has been very successful at La Colorada for several quarters now.
You may recall the high gold/silver discovery from last year, [Monto Uri], is nearly single handedly responsible for the overall higher gold grades in the current La Colorada production.
This year we started in the program to explore the depth expansion of the major NC2 vein which has returned many holes with multi-kilograms silver intersections containing also higher lead and zinc grades and in some cases substantial gold credits.
Drilling in this zone will continue for the remainder of the year (inaudible) an important resource for the future of La Colorada production.
Both Morococha and Huaron exploration focused during the first six months of this year on high-grade targets and the results did not disappoint.
The Morro Solar area at Morococha keeps returning high-grade drill results and development of Morro Solar vein and parallel structures as well underway.
I'm convinced that both of these mines will this year again more than replace the reserves mined during 2009.
I just returned from a trip to Bolivia and Argentina.
As you heard from Steve, both mines, Manantial Espejo and San Vicente, are in full swing and exploration programs have been started at both sites.
Drilling for the Melissa vein expansion, one of the main structures of Manantial Espejo, discovered the continuation of this high-grade vein to the West and (inaudible).
Surface exploration at San Vicente identified several new drill targets.
Both sites will intensify drilling with the start of the southern hemisphere spring in September.
San Vicente is more than an impressive ore body, especially the large and high grade Litoral vein.
Underground development is well advanced and I had the chance to admire a 9 m wide vein with development on already two levels.
Observing massive sulfide ore over such wide intersections containing in some cases up to 10 and 20 kg of silver per ton together with high-grade base metal contents is a special treat for a geologist.
San Vicente has many unexplored or poorly explored veins and exploration programs will continue for years to come.
Our fastest-growing drill program is developing at the Pan American Silver/Orko Silver joint venture La Preciosa project in Mexico.
Drilling started on the 20th of June and is advancing very fast with two large diamond rigs and a third to arrive this month.
As mentioned, we executed a total of over 4,200 m of drilling during Q2 and a total of over 7,400 m to date.
The program focused on infill drilling of the existing resource as well as on new exploration targets in the immediate surroundings.
Current resources based on 100 m space holds which we are currently infill drilling on a 50 m grid.
Surface geology, trenching and sampling discovered additional exploration targets and geotechnical as well as metallurgical test work is underway.
I'm extremely excited about what we are finding on the main mother structure at La Preciosa and I can't wait to get the third rig going on some of the new exploration targets.
This is a very large system with several important structures and I anticipate publishing the first real results early this fall.
Back to you, Geoff.
Geoff Burns - President, CEO
Thanks, Michael.
Okay, you have now heard in detail where we were.
Let's take a moment and look at where Pan American is headed and why I remain optimistic as ever about our prospects for the balance of 2009 and beyond.
We are maintaining our production forecast for 2009 and are planning to produce 21.5 million ounces of silver, not including the production from our Quiruvilca mine which is still moving towards care and maintenance.
We are maintaining our cash cost forecast of $6.00 per ounce for the year which you may recall was already reduced from $6.28 per ounce at the end of the first quarter based on better than expected results we achieved.
We should more than double, actually almost triple our gold production this year and, like silver, are maintaining our 2009 production guidance for gold at 85,000 ounces.
Although frankly, given the fact that we've already produced over 46,000 ounces of gold so far this year, I think we'll do a little better here.
We will continue with the ramp-up of San Vicente, and I trust you guys sensed from Michael as to how excited we are about what we are encountering now that we've started exposing and mining from the Litoral vein.
I think San Vicente is going to positively surprise even us over the balance of this year and beyond.
We're going to restart significant exploration efforts at Manantial and San Vicente now that these operations are up and running.
Some of the most prospective ground in all of Pan American surrounds these two operations and neither property has really been touched with a diamond drill for the past three to almost four years.
Now that we're organized, have our permits and with drill rigs in place we're going to push hard at La Preciosa.
In our opinion it's a tremendous property and a great location and at absolutely the right stage where we can create additional value by bringing this project forward.
There's a defined silver resource in excess of 135 million ounces of silver, it's in Mexico, and literally within an hour of our established infrastructure in Durango and our development group is now available and is being redeployed on this new project.
With no debt, over $200 million in working capital, our heavy capital expenditures behind us, we are positioned to generate significant positive cash flow for the balance of this year.
We are exceedingly well positioned to aggressively look for additional growth opportunities.
Before taking questions I would be remiss if I didn't personally, and on behalf of our Board of Directors, publicly congratulate our operating teams in both Argentina and Peru.
Our Peruvian subsidiary, Pan American Silver Peru, SAC, was selected, as Steve mentioned, the 2008 Peruvian Company of the Year.
While in Argentina our operating entity, Minera Triton Argentina S.A., was named 2009 Mining Company of the Year.
Well done, folks.
These separate acknowledgments are clearly a testament to the dedication of our South American operating teams and proof that being good miners goes hand-in-hand with being responsible corporate citizens, working closely with the countries and the communities that host our operations.
This is a core value at Pan American wherever we operate.
With that I would now like to ask Luke to open the line for questions.
Operator
(Operator Instructions).
John Bridges, JPMorgan.
John Bridges - Analyst
Good morning, Geoff, everybody.
Just wondered if you could give us a little bit more clarification on how you're handling Quiruvilca.
You sort of mentioned it in your prepared remarks, but just wanted whether the -- whether everything was being expensed in the income statement at the moment?
Geoff Burns - President, CEO
Hi, John.
Indeed every dollar that we're spending at Quiruvilca is going through and into our cash cost, we're not deferring anything.
So there certainly are some mine development, we're still doing limited mine development and other things that would normally have been capital that are now coming through as direct operating costs.
So especially the $10, a little over $10 we reported in the second quarter is the fully loaded cash cost.
John Bridges - Analyst
Okay.
Geoff Burns - President, CEO
And in terms of plans, we're still -- as Steve mentioned, we're still preparing Quiruvilca for care and maintenance.
At this price level and with $14 prices and $10 cash cost it may well keep going longer than we probably initially anticipated at the start of this year because it is still making about $4.00 an ounce of production.
So it may go further into 2010.
But the longer-term plan is still care and maintenance for Quiruvilca.
John Bridges - Analyst
Okay.
And then in your latest presentation you've got that remarkable chart of traveling your production since 2002.
Just wondered whether the exploration success you've been talking about is enough to show any growth next year or will you just have reached a steady-state absent deals?
Geoff Burns - President, CEO
I think, John, that we can look forward to some additional growth next year as we see a full year's production coming out of San Vicente and relatively steady-state from our other operations.
We are looking very carefully at the discoveries we've made at our own projects, so you see where there are opportunities for internally generated growth.
Probably the most prospective is at our Huaron operation which is our largest proven and probable reserve where we could look at internally increasing capacity, although it's a little bit premature to talk much more than in those general terms on that.
And then beyond that, yes, we are going to have to push along with La Preciosa which we're very excited about; the more we get into it the more we're liking it.
And yes, followed by acquisition activity to keep that growth profile going in 2011 and beyond.
John Bridges - Analyst
Any possible (inaudible) you particularly like?
Geoff Burns - President, CEO
Well, I mean, simple -- we're going to continue to focus in the areas where we are.
There are opportunities in Mexico, I think there are some opportunities in Argentina and certainly Peru still has some significant polymetallic systems that would fit into our portfolio.
John Bridges - Analyst
Okay, keep up the good work, guys.
Well done, thank you.
Operator
Haytham Hodaly, Salman Partners.
Haytham Hodaly - Analyst
Good morning, gentlemen.
And congratulations on getting development projects ramped up nicely.
A couple of questions.
Just for in terms of forecast production guidance of 21 plus million ounces.
Can you just give us a rough breakdown?
Is there anything unusual that's changed from last quarter or is everything still in line?
Geoff Burns - President, CEO
Actually pretty much everything is still in line.
We had a few pluses and minuses with respect to our Peruvian operations and doing a little better in Mexico.
And as Steve just said, Manantial is -- we're expecting it to be pretty much bang on target for the year.
So I don't think the pluses and minuses are worth going into, Haytham; we're pretty much right where we thought we'd be.
Haytham Hodaly - Analyst
Perfect.
What about CapEx, what's your forecast CapEx you have for the second half of the year?
Geoff Burns - President, CEO
Just give us one second.
Steve Busby - COO
It's about $19 million, just under $20 million.
Haytham Hodaly - Analyst
Can you give a breakdown of that roughly?
Steve Busby - COO
The biggest part of that is part of this powerline development at Manantial Espejo; we have about $5.7 million set aside to joint venture with the government on a power line.
That's still in the air, we may not spend that.
The other big components are at Huaron and Morococha where we're spending about $3 million each for the rest of the year.
Haytham Hodaly - Analyst
That $5.7 million, that was in the $19 million to $20 million, correct?
Steve Busby - COO
That's correct, yes.
Haytham Hodaly - Analyst
Okay.
And maybe one last question just from a housekeeping perspective.
Effective tax rate for this last quarter seemed a lot lower than the one before, I believe somewhere in the low 20s.
What are you forecasting for your effective tax rate for the full year?
Rob Doyle - CFO
Haytham, it should come in right around 30%, that's the weighted average of our tax rates that we operate under.
So subject to any unusual items it should converge somewhere around 30%.
Haytham Hodaly - Analyst
And what proportion of that roughly would be deferred?
Roughly one-third I'm guessing?
Rob Doyle - CFO
That's right.
Haytham Hodaly - Analyst
Perfect.
Thank you.
Operator
(Operator Instructions).
Chris Lichtenheldt, UBS.
Chris Lichtenheldt - Analyst
Good morning, thanks.
Just a couple questions.
Actually just quickly first on -- you just mentioned that you may spend $5.7 million at Manantial, but you may not.
If you do spend that should there be a distinct positive impact on cash flows there?
Steve Busby - COO
Absolutely, yes.
That investment which would bring in a power line, it would probably be a 12- to 18-month period to construct a powerline.
We expect the cost savings with that powerline to be in the neighborhood of $8 million per year of cost savings against our diesel fuel power generation today, so a substantial reduction in cash cost there.
Chris Lichtenheldt - Analyst
Okay, great, thanks.
Secondly, on La Preciosa, I know that you said within 36 months you may be preparing a feasibility, but you mentioned you're really pushing on that given the attractiveness.
Is there a possibility -- like will it take all three years or could that be done earlier based on your aggressiveness?
Geoff Burns - President, CEO
I'll take that one, Chris, provided my partners at Orko aren't listening too closely.
Yes, there is a distinct possibility, I don't want to be too aggressive and give you an earlier timeline.
We typically are conservative in our projections and conservative in our timelines.
But I think there is a reasonable probability that we could get things done faster depending on the work that Michael is doing on the exploration side, the work that Steve and his team are doing on the metallurgical side of things.
And frankly the work Joe Phillips is leading on on permitting and organization structure and water and land acquisitions.
So we are pushing on all those things very strongly.
I would venture to say I'd like to get them done as soon as we can.
Chris Lichtenheldt - Analyst
Right, okay.
And so you may spend more than the $5 million minimum the first year, is that safe to say?
Geoff Burns - President, CEO
I think we're -- our budget this year, as Michael said, is actually $5.7 million to the end of December.
So I mean, we really didn't get going on the ground until May, frankly, kind of mid-May.
So, yes, we're going to push pretty hard and easily cover that number and we're just going to keep ramping forward as the results come through.
Chris Lichtenheldt - Analyst
Great, okay.
Just another quick question on Huaron.
I notice grades are down about 10% from the first quarter.
Is that the level we should expect for the next several quarters going forward or is that transient?
Steve Busby - COO
No, Chris, we're expecting that grade to come back.
What happened there is we have a long hole stoped in a fairly high-grade area that we had poor ground conditions and we lost that stope and it's forced us to go elsewhere that we don't have the grade.
We're now recovering that stope and we expect to get back into the grades probably the latter part of the third quarter and certainly into the fourth quarter.
Chris Lichtenheldt - Analyst
Okay, great.
That's it for me.
Thanks a lot.
Operator
Shey Ylonen, TD Newcrest.
Shey Ylonen - Analyst
Just wanted to confirm the La Preciosa budget for $5.7 million, is that part of your $19 million CapEx budget?
Geoff Burns - President, CEO
No, it isn't, it's not included in that, Shey.
Shey Ylonen - Analyst
Okay, so that's just being expensed?
Geoff Burns - President, CEO
Yes, it will be, that will be expensed.
Shey Ylonen - Analyst
Okay, thanks very much.
Operator
(Operator Instructions).
Chris Lichtenheldt, UBS.
Chris Lichtenheldt - Analyst
Thanks, I just thought of another one I wanted to ask you.
You mentioned there's obviously a $4.00 margin or so at Quiruvilca.
If prices stayed up here indefinitely at $13 to $15 silver and better base medal prices -- you said earlier 2010 potentially, but how long -- do you have a sense of how many quarters exactly you could run it?
Geoff Burns - President, CEO
The great debate, Chris.
There's certainly material that could take us easily to the end of 2010 at these price levels.
After that there really is a major decision point even assuming our cash costs stay where they are and silver stays at $14 because there are a couple of capital expenditures that then we would have to look very carefully at with respect to tailings, management in particular.
The easy answer today is we're going to keep running it as long as it makes money and that could be until the end of 2010.
You'll have to ask me again as next year develops how our plants modify or change.
Chris Lichtenheldt - Analyst
Okay, fair enough, I will do that.
Thank you.
Operator
Haytham Hodaly, Salman Partners.
Haytham Hodaly - Analyst
Just a quick question on the income statement, the net gains on commodity and foreign currency contracts, that was the closeout of the zinc and lead hedges, was that what that was?
Rob Doyle - CFO
Actually no, because that gain was crystallized in the fourth quarter and the first quarter respectively.
So that gain really, because of the weakening of the US dollar against the Mexican peso and the Peruvian sol, that gain is almost all attributable to our FX contracts.
Haytham Hodaly - Analyst
Now when you actually made that announcement that $7.6 million was, for example, from the zinc hedge, you said that a portion would be settled monthly until December 2009, did that change?
Rob Doyle - CFO
No, all of those contracts are settling as scheduled.
But the P&L effect of those contracts was crystallized in the first quarter and there's no more income statement effect.
Haytham Hodaly - Analyst
Oh, I see, okay.
Okay, fair enough.
Thank you.
Operator
Thank you.
And there are no further questions in the queue.
Management, I'd like to hand the conference back to you for any closing remarks.
Geoff Burns - President, CEO
All right, thanks, Luke.
Ladies and gentlemen, thank you for joining us again this morning for our second-quarter conference call.
I again am very optimistic about how we're going to continue to perform over the balance of 2009 and I very much look forward to talking to you in November to discuss our third-quarter results.
Thank you.
Operator
Ladies and gentlemen, this concludes the Pan American Silver second-quarter 2009 earnings conference call.
This conference will be available for replay on the Company's website at www.PanAmericanSilver.com.
Thank you for your participation.
You may now disconnect.